By Patrick Rucker and David Henry
WASHINGTON/NEW YORK (Reuters) - The U.S. regulator for consumer finance said on Friday it would not penalize Citigroup (C.N) for overcharging credit card customers provided the bank returns $335 million to the 1.75 million borrower accounts that are due refunds.
Credit card customers who keep up with their payments are often entitled to a lower interest rate, and Citibank said in February that a computer error led to some accounts missing out on a lower rate.
The Consumer Financial Protection Bureau (CFPB), a leading regulator for Wall Street, decided that the bank deserves credit for finding the problem itself and flagging it to the agency. So it did not fine Citi.
In 2015, the CFPB fined Citibank and its subsidiaries $35 million and forced the bank to refund $700 million after finding that the bank pushed customers into unwanted credit card services.
Friday's decision could encourage banks to be more careless with consumer accounts if they do not fear a penalty when things go wrong, a consumer advocate said.
"What message does this send other banks?" said Karl Frisch, executive director of Allied Progress.
Citigroup said in a statement that it was happy to resolve the matter with regulators and "we reiterate our sincere apologies to our customers for not correcting these issues sooner."
Citi said it first discovered the software issue in 2016. The bank disclosed the credit card problems in February and promised the to refund $335 million at that time.
President Donald Trump's budget chief, Mick Mulvaney, has led the CFPB since November and said the agency has gone too hard after lenders in the past.
Earlier this week, Reuters reported that Mulvaney cut in half a fine that his Obama-era predecessor sought against a payday lender.
(Reporting By Patrick Rucker in Washington and David Henry in New York; Editing by David Gregorio and Cynthia Osterman)